Newspaper article The Christian Science Monitor

Five Good Reasons for Dumping a Fund

Newspaper article The Christian Science Monitor

Five Good Reasons for Dumping a Fund

Article excerpt

Now that the stock market is picking up, people are once again looking at mutual funds as a way to build wealth. While advice on buying funds is plentiful, advice on selling is not. Although there are good reasons to sell a fund, experts say, a recent slide in performance is not one of them.

"The worst reason to sell a fund is because its performance was poor," says Emily Hall, a senior mutual fund analyst at Morningstar Inc., in Chicago. Mutual funds are geared toward long-term results, Ms. Hall maintains, so if a fund performs poorly for a few months to a year, that's not automatically a reason to unload it.

"Negative returns, particularly short-term negative returns, in and of themselves, are not always a reason to sell a fund," she says.

"Clearly, one of the mistakes investors make is buying whatever mutual fund did well last year," agrees Nathan Gendelman, investment strategist for The Family Firm Inc., a financial-planning company in Bethesda, Md. "The other is overtrading," that is, buying and selling funds too frequently, he says. "It's exactly the wrong strategy to employ."

Mr. Gendelman also warns against treating mutual funds and stocks in the same fashion. "People will buy a fund designed to capture an [entire] asset class, yet they'll execute trading strategies with the mutual fund as if it were a single stock."

For example, one school of thought holds that if a stock declines by a certain percentage, it should be sold, because the decline might indicate an underlying difficulty of the company. If a mutual fund declines, however, it could be the result of an entire asset class - international stocks, for example - falling out of favor. As asset classes regularly go in and out of favor, this could indicate a bargain, Gendelman says, not a sell signal.

"The worst decisions investors make is to sell what is out of favor, and buy that which is in favor. It is exactly the opposite of what I am convinced will lead to higher return," says Paul Merriman, president of Merriman Capital Management in Seattle.

People should decide what would cause them to sell a fund before they buy into it, Hall says. …

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